Before turning to the decision in Walton, it is helpful to note the key authorities that are relevant to this issue.
The starting point is section 8(1)(a) of the Insolvency Act 2003 (the Act) which provides a statutory presumption of insolvency:
“8(1) A company or a foreign company is insolvent if –
- It fails to comply with the requirements of a statutory demand that has not been set aside under section 157;
On a strict interpretation, the provision appears to be absolute. However, the Eastern Caribbean Court of Appeal found otherwise in Trade and Commerce Bank v. Island Point Properties SA HCVAP 2009/12. That decision emphasises the wide scope of the BVI Court’s discretionary powers to either grant an order to appoint a liquidator, dismiss the application, or make any other direction or order it deems appropriate. This discretion is fortified by section 167 of the Act.
Specifically, Trade and Commerce considered the interaction between the discretion of the Court expressly conferred by s.167, and the s.8(1)(a) presumption of insolvency; ultimately, it found that s.167 prevails. The judgment confirms the BVI Court’s power to review the underlying statutory demand and that the discretion is available where the respondent has failed to bring an application to set aside the statutory demand within the prescribed 14 day period, notwithstanding s.8(1)(a).
Trade and Commerce further identifies that in cases where the respondent opposes the underlying statutory demand, albeit unsuccessfully, the principle of estoppel may prevent it from defending a winding up petition on the same grounds. However, Trade and Commerce does not explore the type of estoppel that is engaged in such circumstances.
This brings us to the leading authority on estoppel from the UK Supreme Court, Virgin Atlantic Airways Ltd v. Zodiac Seats UK Ltd  UKSC 46,  3 WLR 299. Whilst Virgin Atlantic was not an insolvency case, its principles are nonetheless universally applicable. Virgin Atlantic identifies six types of res judicata, three of which are of potential relevance in the Walton case:
- Issue estoppel, where a party is precluded from raising in subsequent proceedings an issue that has already determined and the parties are bound by that earlier decision;
- Henderson v. Henderson estoppel, where a party is precluded from raising in subsequent proceedings a matter that could have and should have been raised in earlier proceedings, and has failed to do so; and
- A general estoppel against abusive proceedings.
These three types of estoppel are potentially engaged in cases where a respondent has brought an unsuccessful challenge to a statutory demand and thereafter, seeks to oppose the subsequent winding up petition. However, the position is different where the statutory demand application is not challenged at all.
The Decision in Walton
The principal question considered by the BVI court in Walton was whether any of the three above-mentioned Virgin Atlantic estoppels applied in cases where the respondent had not challenged the statutory demand.
For obvious reasons, it concluded that issue estoppel did not apply. The basis for opposing the winding up petition had not previously been argued before the BVI Court as there had not been an application to set aside the statutory demand. The validity of the statutory demand had yet to be determined, and so the issue of its validity was still open to be considered.
The BVI Court also found that both Henderson v. Henderson estoppel and estoppel against abusive proceedings did not apply. This approach follows Trade and Commerce, in which the Court of Appeal confirmed that it was not an abuse of process for a company to resist a winding up petition after it had failed to challenge the underlying statutory demand. Whilst the BVI Court accepted that the respondent should have and could have challenged the statutory demand on the same grounds as those raised in opposition to the winding up petition, it acknowledged that the decision in Trade and Commerce goes directly against the application of Henderson v. Henderson estoppel.
Accordingly, a respondent is entitled to dispute an application to appoint liquidators even in circumstances where it has failed to challenge the underlying statutory demand without good reason.
In this case, the respondent sought to oppose a winding up petition by raising a defence of set-off that was some 300% of the value of the unchallenged statutory demand. That set-off arises from a valid arbitration award against the applicant which was issued by the China International Economic and Trade Arbitration Commission in Shenzhen, People’s Republic of China.
The secondary question that the BVI Court considered was whether there were special circumstances that made it wrong for the court to dismiss the petition (the relevance of special circumstances was established in Re Bayoil SA  1 WLR 147). It found that there were no relevant special circumstances. However, it should be noted that a significant factor in this decision was that the defence of set-off was supported by a valid arbitration award, and was therefore a genuine claim of set-off. The fact that the cross-claim could not be litigated in the BVI jurisdiction was irrelevant and did not prevent the BVI Court from recognising the cross-claim and assessing its genuineness.
The respondent in Walton was successful in opposing the application against it, thereby confirming that a failure to challenge a statutory demand is not necessarily fatal in subsequent winding up proceedings. Nevertheless, there remains a risk associated with failing to challenge a statutory demand as it is a highly fact-specific issue. Such respondents may also find themselves in a disadvantageous position on costs and indeed in some instances, may even face adverse costs orders.